The used car dealer's share price continues to drop as investors plan for a likely bankruptcy.
Carvana's financial decline continues as investors are now consulting with lawyers and investment bankers regarding their next steps.
Per Bloomberg, Carvana is burning through cash at a rate in which its future solvency is now under threat. Plunging used car prices and overpaying for those vehicles in the first place is what mainly caused the company, made famous for its so-called "vending machines," to be in its current state.
The report confirms Carvana executives have spoken with financial advisors regarding their steps, including the possibility of bringing together its largest creditors in a single block to help its negotiating position. Carvana refused to comment on the story.
All told, bondholders Apollo Global Management Inc. and Pacific Investment Management Co., who signed a cooperation agreement this week, have roughly $4 billion of the online retailer's unsecured debt, totaling around 70% of its total outstanding debt.
The agreement will last at least three months. Meanwhile, Carvana shares dropped more than 40% after the creditor mentioned above was announced. In other words, the stock market is already bracing itself for Carvana's possible bankruptcy. That agreement is designed to help restructure debt and secure more financing. They also help avoid creditors from fighting during bankruptcy negotiations.
The past 12 months or so have been challenging for Carvana in several ways, aside from seeing its stock price nosedive by more than 97%. There have also been titling and registration issues that resulted in some locations having their licenses suspended.
Customer service issues have also come up, such as the case involving the buyer of a Volkswagen Tiguan. The used crossover turned out to be a lemon, and Carvana didn't handle the situation well. Last month, Carvana slashed around 1,500 jobs (roughly 8% of its workforce) in order to help stop the cash burn.
That clearly was not enough, as investors are now bracing for the worst. Since Carvana went public in 2017, it has posted net losses every business quarter, except one. It's had negative operating cash flow in every quarter, again with a single exception.
Based in Tempe, Arizona, Carvana was one of the few companies that actually benefited from the coronavirus pandemic as consumers quickly flocked to online retailing.
In 2020, Carvana's shares increased by 160%. The party lasted only a short time. What happens next is still being determined, but a bankruptcy declaration is looking more likely than ever.